Stall Speed

The problem with a deflationary collapse of a credit bubble is that everything that worked for you on the way up works against you on the way down. It's sort of like Judo gone wrong.

Where rising levels of credit masked poor business decisions and models, shrinking credit will expose them.

Where credit led to more credit, defaults will lead to more defaults.

Where optimism fueled the ride up, pessimism will drag it back down.

The difficulty for the Federal Reserve and the Treasury Department (and soon, Obama) is that all the big solutions with the big numbers being thrown at the big problems are insufficient. The stimulus is not reaching the right places – it’s getting stuck in the big institutions.

So even as prodigious amounts of money are being created and applied to “the problem,” the evidence suggests that their efforts are not working down on Main Street.

The reason for this is very simple – it is not possible to solve a crisis of solvency with liquidity. It is not possible to fix a crisis of malinvestment with the purchase of bad debts.

Here’s one example. Take retail store space. On the ride up, malls were developed at a furious pace. By every definition or comparison, the US overbuilt capacity in this sector by a very large amount. Given this, what’s going to happen next when this malinvestment is exposed? Well, we don’t have to wait to find out the opening notes of this symphony.

Dec. 18 (Bloomberg) -- U.S. retailers will face a Darwinian fight for survival next year as they run out of cash as early as January and competition forces thousands of store closings, according to private-equity buyers and restructuring experts.

Probably 50,000 stores could close without any effect on consumer choice, Gregory Segall, a managing partner at buyout firm Versa Capital Management Inc., said yesterday during a panel discussion held at Bloomberg LP’s New York offices.

“The United States is massively over-stored in all categories,” Segall said. He said his firm is in “a wait mode” and he expects banks to squeeze retailers after Jan. 1.

The answer is that retail companies will go out of business, stores will become vacant, and the Federal Reserve will find themselves buying up a lot of the failed mortgage notes and exotic derivatives built out of commercial real estate debt, if they haven’t already.

But how does this help? The debts are going bad because they represent a bad business decision, undertaken because of false price information, flashed by the mega-credit bubble, spawned by the meddling activities of the Federal Reserve.

The stores are going out of business because the vaunted consumer has left the store and isn’t buying anything. The ripple starts there and spreads throughout the system, knocking debt pillars out at every step of the way.

As consumers cut back, inventories pile up, and then the production gets cut at the factories. In turn, their suppliers feel the burn and have to cut back.

The fear for the Fed is that once this dynamic takes hold, it can develop a life of its own that is extremely difficult to control. Here are two examples of this dynamicat play:

Automakers aren't the only ones halting production as inventories pile up. The consumer electronics industry is also coming to grips with rising stockpiles of unsold goods that are likely to result in price pressure and falling profit.

Recent evidence of growing inventories came Dec. 15, when SanDisk (SNDK), a maker of memory cards and storage drives, said it will temporarily stop production at two Japanese plants for two weeks through Jan. 12. After that, the factories will resume work at 70% capacity.

SanDisk hopes the cutbacks will help it whittle away at the piles of unsold devices in warehouses and on retailers' shelves.

Last Friday, the world came to a standstill in Sindelfingen, a town located near Stuttgart. On normal days, about 1,500 trucks and 52 rail cars arrive at the Mercedes plant in Sindelfingen, carrying steel and glass, tires and dashboards, headlights and seats. More than 36,000 employees pass through the factory gates every day to develop new models and assemble the current ones -- the Mercedes C, E and S classes. On normal days, at least 1,500 cars roll off the assembly lines at the plant. But what is normal nowadays, with new reports on the recession coming in each day?

Now the Mercedes plant is closed -- until Jan. 11. Production facilities worth billions have been shut down. Everything, from the paint shop to the welding and production robots to the assembly line itself, has stopped moving.

The worry here is that the economy will hit stall speed, at which point its downward momentum just feeds on itself ruining banks, companies, lives, and even countries.

The whole chain comes to a halt and then morphs into a vicious cycle, where cutbacks lead to job losses, which lead to reduced economic activity, which lead to cutbacks, and so on, down and down, until some sort of a bottom is reached.

Typing “Production Halt Slowdown” into Google and constraining the results to the past month yields 150,000 results from all over the world.

We’ve recently seen headlines about 20%+ export declines for Japan and a shipping index that does not even cover the cost of the fuel and the crews, let alone debt service and insurance. We've heard about Rio Tinto, the mining giant, laying off 14,000 workers. We've seen the record declines in spending and capital investment.

Taken together, we have many more signs that the game is being lost by the world’s central banks than signs of progress.

Whether this can be fixed with another few hundred billion, or even a few more trillion, tossed in the general direction of a few well-connected Wall Street banks is highly questionably at this point.

Given that neither the Fed nor the Treasury has displayed any real understanding about the roots of this problem, it would be wise to prepare for a protracted slowdown and a possible hard landing.

These lectures I read about six months ago and now it all seems to be coming together, I emailed them to a friend of mine who thinks I'm nuts, he thinks everything is going to be fine but when I asked him about peak oil he said he never heard of it. I want him to see the Crash Course but he is mostly deaf and would not be able to hear it, I sent him a web page instead. Since I've been handing out the CC I get the same response from most people, everything will be fine, I'm hoping they will watch it and I can have a discussion afterward, I'll let you guys know.

These are lectures that G. Edward Griffin gave and were converted to print, this is a person I respect.

Assuming we are in deflation as we speak (according to Mish we seem to be) what happens if we stall? The scenario Chris posits sounds like a deflationary plummet (depression?). What should we expect in terms of the dollar, price of gold, markets, etc.?

Thanks for posting the G. Edward Griffin lectures. I have read only one, so far....it was pretty long. I must say that I do align myself with his individualism vs collectivism stand. There is one thing that bothers me. If I am understanding what happened recently, there was no government oversight of certain activities, and this resulted in some dishonest folks doing things that took advantage of others. How could we, as individuals, have monitored these things and stopped them? Or, was it okay for the individuals, who created the mess, to do so because it was their individual right to do so? It seems to me that some short of balance (and I don't pretend to know the balanced), is required.

If I can join with others to hire cops to do certain things on my behalf, why isn't it reasonable to join with other individuals to "hire" other kinds of government to do things for us? And, I might add, why is it not also okay for we individuals to overpower the bums who did not look out for our individual interests, but were also in on the take?

Seems to me it might be about time for a powerful revolution! And, according to Mr. Griffin, and what he says the Constitution says, that might look like a war! Do you suppose the time will come when individualistic thinkers in this country will rise up and overthrow this crooked, privately held regime? Or, have we waited so long now that their power can never be overcome? And, by the way, if we did rise up and overthrow the bums, what are the odds of us putting in others who would be any better?

Chris, great article. Its so scary to read about all these suppliers temporarily (?!) shutting down production, and to contemplate where this all may be headed. It gives one a sense -ok, a chill- of just how serious the current situation is.

Gabriel, thanks for the link to the Mish articles. What a great analogy!

I found those links on G. Edward Griffins website called Freedom Force International, you might find his site interesting.

No right can violate another right so no it was not okay what those people did, part of the problem is the regulators are in the criminals pockets, it's as if Don Corleone moved his outfit to Washington instead of Nevada. Gotta go, will try to answer your questions tomorrow.

Assuming we are in deflation as we speak (according to Mish we seem to be) what happens if we stall? The scenario Chris posits sounds like a deflationary plummet (depression?). What should we expect in terms of the dollar, price of gold, markets, etc.?

Who cares..... where will you get your food from when the supermarket shelves are empty?

I've seen empty shopping malls in my area and more with unfinished construction for some time. This ongoing proliferation has seemed so wrong to me that it's hard to believe it's taken any "experts" by surprise that something's out of kilter here.

Your clarity and use of examples from the real world make your points (as well as the Crash Course overall) accessable and appreciated for those of us who are way outside our comfort zones when dealing with the current financial mess.

* Greg - try this forum for discussion on getting the Crash Course ideas to a wider audience.

In the midst of this mess, I wonder what SHOULD the government be doing? It is easy to criticize all of the government spending as just layering public debt on top of bad private debt. However, doing nothing is probably not a good plan either. Doing nothing lead to the default of Lehman Brothers, which precipitated the closest thing we've had to a major systematic meltdown.

I personally think that the Fed's buy-up of long term treasuries is an interesting and powerful tool that they are using. Clearly, the goal is to get long term rates to drop - so that ARM resets will be harmless, thereby forstalling yet another leg-down for housing. This could limit the damage on the leading edge of the default wave.

Certainly more stringent conditions on the dollars going to the banks should be required, and perhaps a more selective process where the most egregiously insolvent banks are shut down by the FDIC rather than bailed out. And if we are going to spend money to keep unemployment from rising into the stratosphere, then the projects should be a long term investment rather than a make-work program.

It seems to me that the challenge ahead is to ratchet down the economy in response to diminishing natural resources. Is it perhaps possible to do that through successive deflationary episodes, interspersed by short periods of recovery? You stress the inflationary aspects of government spending, which cannot be denied if they are out of line with the GDP. But in a deflationary episode the total money supply should shrink as debt and money annihilate one another. A world-wide Japanese style stag-deflation may be just what we need to counteract peak-everything.

i have one thing on my chris martenson list this christmas. i am sitting in you living room and having some nice herbal tea and cookies and the fire is nice and warm. the tree is glowing and it is snowy outside.

it is a time for family and friends and reflection on the values that mean the most to us. a time to reflect on the blessings we still have in our lives.

how about one post from the good doc that gives us some good news. some hope some sense that there are things we can do, things that you are doing in your community to make it a better place or what your neighbors are doing. a little cheer would go a long way at this time.

we are all after all in your living room and you wouldnt want us to be bummed out .................all the time would you ?

Whether this can be fixed with another few hundred billion, or even a few more trillions, tossed in the general direction of a few well-connected Wall Street banks is highly questionably at this point.

Oh come on, just say it. It does not have a snowball's chance in hell. A good portion of the economy is going to evaporate next year and Obama's plan won't even sop up the first quarter losses. Hope he has a plan B... Knustler nailed when he said a more appropriate campaign slogan would have been *Change I can't believe*

I would never, ever, be presumptuous enough to think I know what Chris would tell you, in his living room, in front of a nice fire, a glowing tree and snow outside (although I really did enjoy that picture).....but, if I could make a wild guess, I'd just bet he would say something to us like this:

"Folks, (1) Keep abreast of what's going on, as best you can, and help us get the word out to as many others as possible, (2) Do everything you possibly can in the best interest of yourself and your family, using the information you can gather and your own judgment, (3) Trust that you can get through this because you have garnered some good information and important skills for living a sustainable life, and (4) Stay flexible, and be willing to change, because it will primarily be the ones who resist change that will suffer the most. Be assured, that when we do come out the other end, things will be vastly different from what they have been."

Now, to me, that's good news!

Now, all I have to do is sit back, and see what Chris REALLY tells us. And, I'm willing to be wrong.

Despite the economic, energy and political situations we face, I wish that each of my fellow "Chris readers" can put all that aside for just long enough to be thankful for what we have this Christmas, and hang on to your confidence that we will get through this mess, and, sooner or later, we will know financial prosperity again. In the meantime, it might be good for all of us to remember all the other, different kinds of prosperity, that we enjoy right now, most of which may not look anything at all like money.

Thank you for the honest posting Chris. This begins to touch on the unspoken....what happens if our world economic system collapses? Will our social systems break down, will there be chaos, rampant crime, starving families? A lot of us talk about preparing for such possibilities and this post serves to remind me that we might have reached a point of no return. I am not as fortunate as some of you - I live in the middle of an urban area, dependent on "just-in-time" inventories and a social structure that provides me with my basic needs. To be sure I've stocked a fair amount of emergency food and other supplies but realistically, those things won't save me and my family in the event of a real, and increasingly likely, world financial collapse. Would I like to buy a self-sustaining rural farm NOW with a few like-minded individuals? Sure, and a few of us have talked about it. But it is very hard to go from talking to doing. I would appreciate any suggestions, comments and observations from the CM.com community. (btw, I am in Southern California)

Despite the economic, energy and political situations we face, I wish that each of my fellow "Chris readers" can put all that aside for just long enough to be thankful for what we have this Christmas, and hang on to your confidence that we will get through this mess, and, sooner or later, we will know financial prosperity again. In the meantime, it might be good for all of us to remember all the other, different kinds of prosperity, that we enjoy right now, most of which may not look anything at all like money.

My family has decided that this could be our last 'effluent' Christmas..... so we are going to make the most of it, as sustainably as possible, but we won't be moaning about or wishing for a miracle.....

I am curious Damnthematrix, what does "sustainably as possible" mean? Everyone is talking about sustainability but what are the facts on the ground? How is your family prepared? Not looking for abstracts, real examples....please!

have you hooked up to SharonAstyk.com 's site yet? It is absolutely wonderful addressing the practical issues of how to deal with the up coming problems given the direction the economy is going. And she address the issues of how to cope with where you are right now (for you, urban area). I just finished taking her "adapting in place" online course which was very interesting (and included people from all different areas and parts of the world!). I would suggest you go read some of her past blogs... you'll feel like you can begin to get a handle on what to focus on.

My daughter, 26, works in San Diego and we are in Northern California (above Santa Rosa). We were able to purchase some land and have been working on homesteading sustainably for the last few years. We worry about her being down there, because of the tremendous population load & poor water&food issues. She does have a backup plan to head up this way if things did get "bad" suddenly. Perhaps the two of you could match up online and discuss/support each other. She is renting a room, but has been working on aquaponics (food & fish) in a sustainable system. The co-worker she is renting from is very interested in gardening, etc. They are both engineers so are tackling things with a "can do" attitude.

My feeling has been that you can't eat "silver, gold, or whatever".... being able to provide for ones basic needs begins to build a level of security while facing a chaotic world. Not that "we" have THE correct answer; just a possible solution.

Maybe, just maybe, they'll realize that pouring oil on new roads will drive the price of oil back up and choke off any possibility of an economic recovery. The IEA report is clearly ignored but I think that it, like the law of gravity, can only be ignored for just so long.

Anyway, perhaps our new economy can be based on sustainable living and energy and it already seems that we no longer will be 25% of the population that consumes 75% of the resources.

In 2003 my family downsized. We went from 4,000 sq. feet to 1,800 sq feet. My career changed. We drive used cars, and if we can't buy it we don't. Bottom line, we learned that being a servant to debt and fixing plastic stuff from China didn't bring happiness.

I hope the flight to our destination isn't that bumpy and I hope the idiots in charge wake up and steer us to the right airport. Maybe along the way they can destroy our dollar and wipe out the insane debt they racked up over the past 30 years. One thing is certain, a stall is a stall. In flying, when that stick shaker makes you put down the USA today you know that you have to get the wings unstalled. Hopefully this economic stall will wake em up.

First - this is an amazing community. Thank you again Chris and everyone who is putting so much thought and effort into making our world work in the be here now and future.

Second - a friend sent me the link to http://sharonastyk.com/ this morning. What are the chances of that - two browser windows open with the same reference? No, I'm not really asking anyone to do the math.

Third - there's a lot to be thankful for but I'd remind anyone who can to put good health on their list. I know there's some other old hippies on this site but I haven't seen much discussion about ageing population issues. A new forum topic perhaps?

When we first met Chris a few years ago, and he helped us knit together a lot of the observations we were making about this civilization. Namely that this path our society/economic system is on fairly clearly unsustainable. Only the details of how it will change were/are a mystery.

We made some decisions a couple of years ago based on this probability: simplifying our lifestyle, getting out of all debt, and moving to the family farm. But its still terrifying to watch it all playing out, its like watching a slow motion train wreck! If the rest of the world suddenly dissappeared, we'd actually be ok on the farm. But what we fear, unfortunately, is our fellow citizens. Scared, cold, hungry people - who are armed, historically are not much fun to be around. But I refuse to raise my children in a paranoid armed encampment. So our best security is helping people.

If the grocery stores get empty, we can help feed a lot of other people. And we hope that in turn they will help protect us if things take a violent/chaotic turn in the United States. And I believe that the best security for all of us is not to hide behind locked doors, but to help each other out as things transition. Extend helping hands, shovels, flashlights and food to our fellow citizens.

Every problem has a gift in its hands, and if our civilization COULD somehow continue developing, consuming and speeding up at the rate we have been for the last 100 years. Can you imagine what a cesspool this planet would be in another 50-100 years? (The movie "Idiocracy" - is not a great piece of film, but it is a cute satirical look at what things might be like down the road if we could keep our civilization on the same clip its been on). Slowing down, rediscovering community, family and the world might be a pretty worthwhile result of this change.

But the change over will be hard, and possibly terrifying at points. So lets extend hands to each other, and *adapt*!

Start a Transition town http://www.transitionculture.org/ slash http://relocalize.net/ by far your best form of 'defense' in a changing world, because frankly, WTSHTF, we'll all be on our own, the government and multinationals have no idea how to cope with this crash, they're all wallowing in the their own $%^!T

This article was titled "Miners becoming less energy-efficient". What it REALLY means, and something the author either does not know or does not understand, is that this is an ominous sign we are hitting the wall very quickly now, because if energy intensity in the mining sector is increasing at 3.7% pa, then resources will either become very expensive very quickly.... or they will become unavailable if the deflationary trend continues.

Very interest article about deflation... but the author has a diffent opinion on the US dollar and Gold than Chris

Steve,

Thanks for the post. I read through the article but I'm unconvinced. If you have defaults crashing backwards through the system (which we do) then we are in a period of deflation (which I agree with) and Chris has suggested the same.

But the article you quote doesn't consider the Fed purchasing assets using the thin air of electronic money creation (they don't generally have to worry about physical money printing). They have limitless power to fight deflation if that is what they choose to do and they made this announcement to do so:

During a period of deflation I would be concerned with debt defaults - we can move our money around trying to keep it safe from the musical chairs of disappearing money and hope we are wise/lucky. Personally I'd rather turn the money into something tangible. Chris has made comments about gold (amongst other things) and I prefer farmland (though that clearly isn't an easy strategy because farmland simply isn't money-like), but as an alternative anything that can allow us to be entrepreneurial/sustainable is an extremely good use for our funds. Basically converting money into something that can provide ongoing future benefit is the way to go - such as a small dwelling debt free, or making investments to cut energy costs through energy efficiency or renewable energy sources, or buying equipment to process/store your own food, take up gardening, raise livestock, etc.consider: http://sharonastyk.com/resources2/victory-gardens2/ If everyone just sticks their savings in gold or US dollars we can all just sit and stare at each other but we will have arrested the types of changes in the economy that we actually need to have happen (live sustainably / be entrepreneurial / encourage sustainable farming and local processing of food, provide local services to / trade with each other, etc.).

If we want a sustainable economy to form then we need to take action towards creating that new economy. Believe me, the very action of doing this will create the new sustainable economy we so desperately need. Every step you take will cause the economy to evolve in that direction you've chosen. [By the way, I'm taking the idea of the economy being a function of evolution under similar principles that the scientific approach to evolution in life is understood - please see the book The Origin of Wealth - Evolution, Complexity, and the Radical Remaking of Economics by Eric D. Beinhocker] Consider the evolution that the economy has experienced from the individually small, but magnified on a large scale profound, that two other readers have mentioned in the last few days:

Here's my take on the US dollar - view it as a train station and imagine assets being travellers choosing from a variety of destinations. As financial affairs are being rebalanced all over the world the travellers(assets) are being converted into the central train station - the world's reserve currency - US dollars. In this case the value of the US dollar would rise as the train station would be crowded with demand. This effect might be temporary like travellers considering new destinations they might perceive to be of better value - foreign currencies, real estate, paying down debt, etc.

Eroding confidence in the US dollar from rampant money creation may precipitate an exit from the train station that might be less than orderly.

The saving grace in all of this (for now)? Since the entire world economy has been structured using the US dollar as the reserve currency there isn't an easy/short term answer for alternative destinations for these US dollars to leave the train station.

But I wouldn't wait and rely on easy answers. Any plan you devise takes time to implement. Don't wait. Start planning / acting now. First mover advantage. Make the economy evolve the way you want the world to be.

Hi James, thanks for you in-put. Where I stand, is that no-one, not even Chris, know for sure 100 perent what will happen in the future. What we do know is that there are major assets deflation and the fed is printing, trying to inflate out of the crisis. We do not know if the FED will be able to achieve what they trying to do. I think is best to wait for some signal in the future market (commodities) and currencies.

Its does not rally matter if you buy Gold at $700 or $1000, if Chris theory come to fruit, GOLD will be well over $2000. I rather wait to buy it higher and have a better chance of being correct. The signal in the market is that there are still major deflation... Oil, cooper, all the metals is trading at the low or near the low. If there are major deflation, I am pretty sure GOLD will not go any where quick! Remember all commodities is price is the US dollar, therefore if the dollar will have major drop, most commodities should stablize first and move up! This week soft commoodities (soy, wheat and corn) is trying to break out. This is just my take of the current crisis.

I know the IEA study leans toward bullish, and I know there is a contango BUT and this is a big but but, I think, China could implode...I'm sure if the dollar tanks first that would be different...my 2 cents

Happy Holidays. My career came to an end. It was sink or swim. In 5 years we moved 4 times, built our house (litteraly all by ourselves, did everything but foundation, sheetrock and roof shingles) sub-divided and sold off land we had purchased and my wife started her own business, which I now help with since the house is done.

Hi James, thanks for you in-put. Where I stand, is that no-one, not even Chris, know for sure 100 perent what will happen in the future. What we do know is that there are major assets deflation and the fed is printing, trying to inflate out of the crisis. We do not know if the FED will be able to achieve what they trying to do.

Thanks Steve,

You're right - not only can anyone know 100% about the future but it isn't even possible. Referring to Nassim Taleb's book The Black Swan if you were to take 1000 equivalent realities (exact same people, intentions, etc. in the world today) and set each of these in motion in simulation you would find that just from pure randomness there would be a wide variety of outcomes. Thus the future is a collection of infinite possibilities - of which only one will occur. The Black Swan is an excellent book for an understanding of risk and probabilities - and a scathing assault on traditional economics.

Referring again to the book The Origin of Wealth again (p. 185) - the overall economy likely emerges from three factors: people's behaviour, institutions (Federal Reserve is our primary focus here) and factors impact the economy from outside (such as 911). Since the outside factors are Black Swans, although unknowable we can do our best to identify them so that they aren't Black Swans anymore and Chris has woven together the effects of many of these, then our task is to focus on human behaviour and institutions. Fortunately some of these factors have predictability so we can come up with a range of probable future outcomes.

Regarding gold I'd encourage everyone to become a subsciber to get Chris' thoughts. But there is a larger message here that we are trying to communicate to a larger audience and I'd encourage everyone here to become a subscriber to help support this initiative.